We normally would have written our first blog article of 2016 at the beginning of the year, but the market began with a plunge and we decided to observe a while before communicating our thoughts. Remarkably, after about 2 ½ months nothing has happened – the market is exactly flat, after suffering through a 10.5% correction (see S&P 500 chart for 2016 below). In fact, not much has changed in the past 18 months, after all the ups and downs the market is basically unchanged. Since the Fall of 2014 a bank CD or a Treasury bond would have been a better investment than just about anything else. Surveys showed that 70% of investors lost money in 2015, with the other 30% comprised of people holding lots of cash, or luckily concentrated in a small group of technology stocks. Despite mostly flat performance we do not advocate a move to cash or similar investments, as the longer term view must be adhered to for most investors. Over time riskier investments will outperform cash and treasuries.

What we find remarkable are the huge swings in sentiment and conventional wisdom that can occur in a very short period of time. Consider that in January and early February the market was “worried” about the following:

Slower growth in China – China’s economic growth slowed to a 25-year low of 6.9% in 2015. China’s growth did not actually drop and is not anticipated to decline, with 2015 growth still the highest by any major economy except India. Only the rate of growth slowed, just a bit, down from 7.3% in 2014.

Plunging commodity prices – Oil prices fell into the $28-$29 range, but no one can seem to explain how this hurts the overall U.S. economy. In fact, a recent Fed report concluded that “the U.S. as a whole benefits from lower oil prices because they increase consumer disposable income and decrease firms’ energy costs.”

Negative Interest Rates – The idea of banks in Europe and Japan charging for deposits (by institutions, not regular people) seemed to bolster the impression that “things are not right” in the world economy.

Recession Fears in the U.S. – While economic statistics did not point to a U.S. recession, slower growth in China and general jitters led to recession fears. The Fed thought the opposite, which is why it raised the Fed Funds interest rate late last year and is planning on more increases this year.

in just a few weeks sentiment has completely changed even though the facts are mostly the same. The new views:

China growth concerns have been set aside and barely mentioned in the recent market rally. Perhaps the market realized that China accounts for only 1% of the combined profits of the top 500 companies in the U.S., and only accounts for 1%-2% of U.S. GDP. While the implications of a weak China should not be dismissed, its correlation to U.S. profits is hard to quantify.

Oil prices are off their lows but still extremely depressed. Even though as a net importer low oil prices help our economy, somehow the slight price increase is seen as a positive for stocks. At some point stocks & oil will be decoupled.

Negative Interest Rates – Still happening with even further dips into negative territory, but this time it is “spun” as a positive, part of aggressive measures by the European Central Bank to stimulate sluggish growth.

Recession Fears in the U.S. – While no one is predicting stellar growth, the lack of any truly bad news or data eased recession fears.

Our conclusion is that while the nebulous “market” seeks to find explanations for its up and down moves, more than ever it really trades on psychology, herd mentality, and most of all, fear – both of losing money and just as important, missing out on the rally. With computer driven buying and selling comprising an estimated 70%-80% of total stock market activity, rational, human thinking seems to have a much lower than ever role in markets. Unknown algorithms tied to various factors drive the market, which means short term trading is more treacherous than ever. The corollary to this is that more than ever market experts have no idea what they are talking about and it pays to ignore all predictions. This knowledge should help guide investors who may be tempted to actively trade in response to volatility in the market. We continue to recommend a basket of various stock index fund ETFs for the stock market exposure of one’s portfolio as a long term holding, and avoid investing in individual stocks. Prepare next for explanations of market movements tied to the outcome of the primaries & Presidential elections.

Downtown Investment Advisory begins its third year of operations with over $28 million under management. We continue to work with accounts of all sizes, from $100,000 to over $5 million, helping retirees or near retirees, young families, and charities. While our portfolio strategies are broad and include allocations to various combinations of stocks and fixed income, about two-thirds of assets are invested in managed fixed income accounts with clients seeking to earn steady annual income in the 4%-8% range. DIA's value proposition remains sophisticated, conflict-of-interest free investment management & financial planning services tailored to each client, with an emphasis on intense personalized service and attention, at a highly competitive cost.

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